Initial Coverage Pha Lai Thermal Power Joint Stock Company

Transcription

1 28 TH J ULY2008 Pha Lai Power PPC VND26,600 US$1.61 (3.0%) Lack of Sparks HOLD Office: Phao Son Hamlet, Pha Lai Town Chi Linh, Hai Duong Province, Vietnam Telephone: ( ) Fax: ( ) Website: Contact: Ownership sonnk.ppc@evn.com.vn Mr. Nguyen Khac Son General Director State 220,574, % Foreign 54,569, % Domestic 50,091, % Outstanding shares 325,235, % King Yoong Cheah, ACA, CFA Head of Research king.cheah@mekongsecurities.com Tri Nguyen Analyst Tri.m.nguyen@mekongsecurities.com Opera Business Centre, Floor 9A, 60 Ly Thai To, Hoan Kiem District Hanoi, Vietnam Tel.: Fax: Saigon Finance Centre, Floor 9 9 Dinh Tien Hoang, District 1 Ho Chi Minh City, Vietnam Tel.: Fax: Company s Statistics Exchange Ho Chi Minh City Stock Exchange Last price VND27,400 US$ 1.66 Sector Utilities Expected EPS VND1,993 US$ 0.12 Index weight 4.6% Trailing EPS VND2,542 US$ 0.15 Market cap. VND8,911bn US$540mn BPS VND12,125 US$ week range VND67,500 VND24,000 Hist DPS VND1,500 US$ day average daily turnover (mn) US$7.11 Dividend yield 5.5% Beta 0.9 Expected PER 13.7 ROCE n.a. P/BV 2.3x Investment Highlights Exchange rate: 1USD=VND16,500 We are initiating our coverage for (PPC) with a HOLD recommendation and a target price of VND26,600 (US$1.61) based on our discounting cash flows (DCF) model. Our investment case is highlighted as follows: One of the largest domestic power operators. PPC is one of the largest coal-fired thermal power plant operators in Vietnam. The Group is principally involved in the production and sales of electricity to the state-owned Electricity of Vietnam (EVN). PPC supplies about 40% of the Northern Vietnam s electrical output, which is equivalent to 10% of the national total. It operates two power plants, the PhaLai I and the PhaLai II with a total designed capacity of 1,040MW and an average output of about 6.7mn MWh per year. Unexciting earnings prospects in the near term Given that PPC s power plants are currently operating at full capacity and the average selling price to EVN is fixed with only limited adjustment for increase in raw materials prices under the current power purchasing agreement (PPA) which will expire in 2010, we do not foresee any near term catalyst to boost the Group s earnings going forward. Currency translation loss could be significant due to depreciation of Vietnam Dong against Japanese Yen The Group has a large amount of Yen denominated bond totaling US$312.3mn at the beginning of Therefore, the currency translation losses arising from the continued depreciation of Vietnam Dong (VND) against Japanese Yen (Yen) could significantly dampen the Group s earnings going forward. We have incorporated a currency translation loss of US$30mn for 2008 and US$5mn for 2009 into our earnings model. The Group typically makes a one-off currency translation loss provision by the end of the year. Reasonable valuation. Our target price gives an implied expected 2008 PER of 13.3x, which is marginally higher than the global average expected PER of 12.5x. Although we like the Group in view of its hands on management and strong cash generation capacity, we do not foresee any potential catalyst to re-rate the stock in the near term. Analysis of Share Performance PPC s share price has corrected significantly in line with the equity markets. The Group s share price has fallen by 54.0% year-to-date, compared to the 53.7% correction in the VN Index. Foreign interest remains strong in the stock, with foreigners accumulating 9.9mn shares year-to-date, thus increasing the foreign ownership from 13.7% to 16.7%. PPC s Price Chart 1

2 Earnings Outlook We believe that the PPC s earnings prospects will be unexciting in the near term given the full utilization rate of its power plants. We expect the Group s earnings to decline by 21.4% in 2008 before recovering in 2009 adversely impacted by currency translation loss driven by the continued depreciation of VND against Yen. We are forecasting the Group s net earnings for FY08 and FY09 to be US$39.3mn and US$56.5mn, respectively. Unexciting earnings prospects in the near term Given that PPC s power plants are currently operating at full capacity and the average selling price to EVN is fixed with only limited adjustment for increase in raw materials prices under the current power purchasing agreement (PPA) which will expire in 2010, we do not foresee any near term catalyst to boost the Group s earnings going forward. No risk on margin compression due to raw material cost. While coal prices have soared the company is able to pass on price increases to its customer, EVN, and therefore its margins should not be affected by changes in raw material cost. We have assumed that the average electricity selling price to EVN to increase by 4% per annum. Expect marginal cost savings from improved operational efficiency. Although management has strived to boost the Group s earnings through improvements in operational efficiency, we do not foresee that the cost savings will be significant given the potential staff cost inflation and the expected increased frequency of scheduled plant maintenance. Currency translation loss could be significant due to depreciation of VND against Yen The Group has a large amount of Yen denominated bond totaling USD312.3mn as at 31 st of December Therefore, currency translation losses arising from the continued depreciation of VND against Yen could significantly dampen the Group s earnings going forward. We have incorporated a currency translation loss of US$30mn for 2008 and US$5mn for 2009 into our earnings model. The Group typically makes a one-off currency translation gain/ (loss) provision by the end of the year. Lower earnings expected in the second half. Although PPC has reported strong earnings in the first half which meets 82% of our full year earnings target, we expect earnings in the second half to decline due to the increased scheduled maintenance works on the Group s power plants and potential provision of currency translation loss. Investing in new power projects to boost earnings The Group is planning to invest in new power projects in 2010 to boost its earnings in the long term. Given the lack of financial information, we have not included potential earnings contribution of the new power projects into our earnings model. Income Statement (US$ mn) *2006A *2007A 2008E 2009F Revenue Gross profit Operating Profit* Profit before tax Net profit Gross margin (%) 32.4% 29.3% 28.1% 24.9% Operating margin (%) 25.4% 20.3% 15.8% 23.0% Pre-tax margin (%) 25.5% 20.4% 16.0% 23.1% Net margin (%) 25.9% 21.7% 16.0% 23.1% Revenue growth (%) N/A 0.6% 6.7% -0.7% Gross profit growth (%) N/A -9.1% 2.3% -11.8% Operating profit growth (%) N/A -19.8% -16.8% 44.1% Pretax profit growth (%) N/A -19.4% -16.7% 43.7% Net profit growth (%) N/A -15.8% -21.4% 43.7% *The operating profits for FY06 and FY07 were adversely impacted by significant currency translation losses. 2

3 Investment Risks We believe that investing in PPC is subject to the following risks: Potential breakdown of power generators We expect the frequency of its plant maintenance to increase going forward given that the first plant has been operating near full capacity for more than two decades. We also anticipate the higher breakdown risk of the power generators with its first plants approaching its economic useful life. The expected rising maintenance cost, reduced output due to increased schedule maintenance works coupled with potential breakdown of the plants could dampen the Group s earnings going forward. Continued depreciation of VND against Yen As mentioned before, the continued depreciation of the VND against Yen could result in larger than expected translation loss in view of its US$312.3mn Yen denominated bond as at 31 st of December The bond was issued in 2001 to finance the construction of PhaLai II power plant. Movement of VND against Yen Comparables Price negotiation with EVN. The current PPA between PPC and EVN will expire in We do not discount the possibility that renegotiation of PPA could be undesirable for the Group given that PPC, Vinh Son Song Hinh Hydropower and Thac Ba Hydropower are earning higher return on capital compared with other independent power producers (IPPs). Valuation We are initiating our coverage on PPC with a HOLD recommendation and a target price of VND26,600 (US$1.61) based on our DCF model. Our target price gives an implied expected 2008 PER of 13.3x, which is marginally higher than the global average expected PER of 12.5x. Although we like the Group in view of its hand on management and strong cash generation capacity, we do not foresee any potential catalyst to re-rate the stock in the near term. Country Market Cap (US$mn) Trailing P/E Expected P/E 2008 EV/EBITD A 2008 VINH SON - SONG HINH HYDROPO* VN THAC BA HYDROPOWER JSC* VN n.a. n.a. CAN DON HYDRO POWER JOINT ST* VN Average local HUADIAN POWER INTL CORP-H CH 3, GUANGDONG ELECTRIC POWER-B CH 2, RATCHABURI ELEC GEN HODG PUB TH 1, ELECTRICITY GENERATING PCL TH 1, GLOW ENERGY PCL TH 1, SDIC HUAJING POWER HOLDING-A CH 1, CHINA POWER INTERNATIONAL CH 1, Average international PHA LAI THERMAL POWER VN Source: * management guidance, MKS estimates, Bloomberg ROA (%) ROE (%) 3

4 APPENDICES 1. Corporate Profile PPC is one of the largest coal-fired thermal power plant operators in Vietnam. The Group was established as a state-owned utility company under the Ministry of Electricity in It was equitized in January 2006 and subsequently listed on the Hanoi Stock Exchange (HASTC) in May In January 2007, the Group transferred its listing status from the HASTC bourse to the Ho Chi Minh Stock Exchange (HOSE). PPC is currently one of the largest listed companies in Vietnam in terms of market capitalization. PPC is principally involved in the production and sales of electricity to the state-owned EVN. The Group supplies about 40% of the Northern Vietnam s electrical output, which is equivalent to 10% of the national total. PPC operates two power plants, the PhaLai I and the PhaLai II with a total designed capacity of 1,040MW and an average output of about 6.7mn MWh per year. PhaLai I power plant was constructed during with four blocks of 110 MW turbines made from Russia. These generators have sustained capacity utilization rates of around 85% to 90% for over two decades. PhaLai II power plant was constructed in early 2001 with a 25 years and 2.4% interest rate bond sponsored by the Japanese government. The plant is equipped with two 300 MW turbines made by General Electric, USA that currently run on 100% production capacity. Coal and diesel remain the largest cost component for PPC, constituting around 53% of its cost of production as illustrated below: PPC s cost break down Source: Company data 35% 3% 53% 8% 1% Raw materials (coal & diesel) Labour Other cost Depreciation Maintenance 2. Management Team Board of Directors Mr. Pham Kim Lam Mr. Nguyen Duc Hieu Mr. Nguyen Xuan Son Mr. Nguyen Khac Son Mr. Pham Linh Board of Management Mr. Nguyen Khac Son Mr. Vu Xuan Cuong Mr. Nguyen Van Thanh Chairman Member Member Member Member Managing Director Deputy General Director Deputy General Director 4

5 3. Sector Outlook Electricity consumption rate has increased rapidly At present, Vietnam has 29 power plants across the country with power production capacity totaling 13,138MW per annum. About 53% of the power is generated using the conventional energy source such as coal and gas, while the remaining is from hydroelectric sources. EVN controls about 78% of the country s power generation capacity, while the IPPs take up the remaining 22%. According to the statistics released by EVN, Vietnam s energy consumption rate has experienced an average growth rate of 18% per annum in the past few years driven by the rapid commercial and industrial developments, increased urbanization and improved living standards. Categories of domestic power plants in 2007 Source: EVN Vietnam s electricity generated source in 2007 Source: EVN 10% 17% 24% 49% 22% 78% Hydro Coal Gas Oil EVN IPP EVN to boost power supply... Power supply in Vietnam continues to lag its demand, which leads to frequent power outage in the country. EVN reported that domestic power consumption for 2007 amounted to 58.4bn kwh and has estimated that from 2006 to 2010, Vietnam is required to increase the installed electricity generation capacity by an average of 4,000MW per annum to meet the increased power consumption in view of the rapid growth of the country. Vietnam s electrical consumption, supply and shortage rate according to EVN s forecast Source: EVN 120, ,000 80,000 60,000 40,000 20,000 0 Mwh 2006A 2007A 2008E 2009F 2010F 1, Consumption Supply Shortage 5

6 .but may fall short of target Nonetheless, Ministry of Industry and Trade (MIT) believes that Vietnam s power shortage will persist until 2020 in view of potential delays in the planned construction of additional power plants. Furthermore, current inefficiency in the country s electricity network system with total power transmission loss and distribution loss averaging 10.8% (4% for transmission loss and 6.8% for distribution loss) has also aggravated the power shortage issue. The Government has requested EVN to reduce the total power transmission and distribution loss rate by 0.75% per annum going forward to achieve 8% by Implementation of near term measures to curb power shortage. To overcome the power shortage in the near term, Vietnam has started to purchase power from China and Laos. In addition, the Government has introduced the Saving Power campaign and imposed higher incremental rates for industrial and manufacturing companies electricity consumption to encourage efficient electricity usage Rising electricity price going forward EVN is currently operating at a net loss averaging US$75mn per annum for the past few years. The losses are expected to increase further given that the surge in commodities prices will lead to a significant hike in electricity production cost. The Government has planned to increase the average retail price of power by about 3.5% from about 5.0 cents to 5.2 cents per kwh in the second half of Nonetheless, EVN is seeking for further price increases to compensate from the rapidly rising production cost. Nuclear power plants to come on stream in 2020.The Government has approved the construction of two nuclear power plants in Phuoc Dinh and Vinh Hai province by The authorities are currently formulating an appropriate investment model and seeking an advisor for the first nuclear power project from the International Atomic Energy Agency (IAEA). It is estimated that each nuclear plant will cost around US$3bn and have a total output capacity of 2,000MW. The MIT expects these nuclear power plants to commence operations by 2020 and generate about 20% of the country s total output. EVN has estimated that there will be an additional eight nuclear power plants to be constructed by 2025 with total installed power capacity of 11,000MW. Sector liberalization to attract greater investor participation According to the Government s projections, the development of Vietnam s power sector will require an approximate investment of US$40bn. To overcome the supply shortage in the country, the Government has further liberalized the sector through the introduction of the Electricity Law 2004 and the Six Power Development Master Plan to encourage participation from foreign and private investors. 6

7 4. Summary of Financials Income Statement (US$ mn) 2006A 2007A 2008E 2009F Revenue Cost of Sales Gross profit Financial revenue Financial expense SG&A Operating Profit Net other income / (expenses) Profit before tax Taxation (0.8) (2.8) Net profit Balance Sheet (US$ mn) 2006A 2007A 2008E 2009F CURRENT ASSETS Cash & equivalents Receivables Inventories Total Current Assets FIXED ASSETS Investment properties & holdings Others Total Fixed Assets CURRENT LIABILITIES Short-term borrowings Trade and other creditors Total Current Liabilities Net Current Asset / (Liabilities) NON-CURRENT LIABILITIES Long-term borrowings Others Total Long Term Liabilities Net Asset / (Liabilities) SHAREHOLDERS EQUITY Paid-in capital Retained Earnings Other funds & reserves Total Shareholders Equity

8 5. Recent News and Developments VND11,856bn (US$715mn) capital requirement for electricity generation and distribution to the end of nd July 2008, EVN stated that from now (Jul 08) until the end of 2008, EVN would need VND11,856bn (US$719mn) in commercial loans and bonds for its electricity generation and distribution projects, among which VND6,747bn (US$409mn) from local credits, VND1,109bn (US$67mn) from foreign credits, and VND4,000bn (US$242mn) from bonds. Vietnam Northern region will have twelve more thermal power plants by nd July 2008 MIT has instructed EVN to build ten to twelve more thermal power plants by 2015 with total 6,300 7,000 MW capacity in accordance with the Vietnam Electricity Master Plan VI. [Source EVN] Government putting pressure on EVN for the Vietnam Electricity Master Plan VI. 1 st July 2008 The Government is pressing EVN to implement the power projects rolled out under the Vietnam Electricity Master Plan VI. According to the Vietnam Electricity Master Plan VI, the total required installed electricity during the period of is expecting to be about 60,000MW. [Source EVN] PPC request EVN to increase ownership in new thermal projects. 19 th June 2008 PPC has proposed to EVN to increase the ownership percentage in the following thermal power projects: Mong Duong I & II to 20%, Hai Phong III to 31%, Nghi Son to 20%, Hai Phong I & II to 10%. PPC has also requested EVN to allow the Group to invest in Uong Bi 2 & Quang Ninh thermal power projects. [Source PPC] 6. Corporate Actions 19 th June 2008 PPC buy back shares. PPC announced that the company will buy back one million shares using its retained earnings. Time of transaction: July 7 th, 2008 July 10 th, th May 2008 PVFC buys shares in PPC. Trader: PetroVietnam Financial Company; related person: Mr. Dam Minh Duc - member of Board of Directors; volume of shares held before the transaction: 7,491,625 shares (2.3% chartered capital); volume of shares bought: 36,000 shares; volume of shares held after the transaction: 7,527,625 shares (2.3% chartered capital); time of transaction: March 28 th, 2008 April 30 th, th March 2008 PVFC buys shares in PPC. Trader: PetroVietnam Financial Company; related person: Mr. Nguyen Xuan Son - member of Board of Directors; volume of shares held before the transaction: 6,491,625 shares (1.99% chartered capital); volume of shares bought: 1,000,000 shares; volume of shares held after the transaction: 7,491,625 shares (2.3% chartered capital); time of transaction: February 28 th, 2008 March 21 st, Equity Rating Definitions BUY HOLD SELL NOT RATED Positive recommendation of stock under coverage. Expected absolute return of +15% over 12-months, with low risk of sustained downside. Neutral recommendation of stock under coverage. Expected absolute return between 15% and +15% over 12-months, with low risk of sustained downside. Negative recommendation of stock under coverage. High risk of negative absolute return over 12-months. No research coverage and report is intended purely for informational purposes. Disclaimer Copyright 2008 Mekong Securities. All rights reserved. This research is prepared on the basis of information believed to be reliable at the time of publication. Mekong Securities makes no representation or warranty regarding the completeness or accuracy of such information. Opinions, estimates and projections expressed in this document are subject to change without notice. Investors must make their investment decisions based upon independent advice subject to their particular financial situation and investment objectives. Neither the information nor any opinion expressed in this research constitutes an offer or solicitation to purchase or sell any securities or any option, futures contract or other derivative instruments in any jurisdiction. Directors, associates, employees and affiliates of Mekong Securities may have a financial interest in securities mentioned in this research or in related instruments and also undertake brokerage, investment banking and advisory services for companies described herein. This document may not be copied, reproduced, published or redistributed by any person for any purpose without the express written permission of Mekong Securities. Please cite sources when quoting. 8